July 28, 2013— -- intro: Like it or not, we are a credit card culture. They seem to be everywhere. They are on TV, being promoted by the likes of Jimmy Fallon, Alec Baldwin and "Ogre" from Revenge of the Nerds. The imagery is pervasive, and some places ONLY take credit or debit cards. They are also, obviously, in our wallets. There are an estimated 1.5 billion credit cards in use in the United States and that can make them seem pretty ubiquitous. Nevertheless, access to credit cards is a privilege not a right, and if you make mistakes, you'll pay a price – sometimes a hefty one.
With that in mind, we offer this list of serious credit card mistakes and their equally serious repercussions.
Credit card issuers have responsibilities, too. Many of those responsibilities are codified under the Credit Card Accountability Responsibility and Disclosure ("CARD") Act. But consumers' first responsibility is to themselves:
quicklist: title: Paying Latetext: A due date is not a guideline, it's a deadline. Always make timely payments. Set up automatic notifications either by text or email and/or automatic debits from your bank. While the CARD Act mandates a set of rules that must be followed regarding, among other things, when credit card issuers and banks can raise rates on existing balances or future purchases, these things are a certainty when you pay late:
- If you fail to pay your bill within 30 days, you will be reported as late to a credit reporting agency.
- You will be assessed a late fee.
- That negative information will remain on your credit report for seven years.
- Your payment history represents 35% of your credit score.
- In addition to facing higher interest rates on future purchases from the offended credit card company, you run the risk of paying higher rates and/or having your application rejected when you apply for other credit products.
quicklist:title:Paying the Minimumtext: If you have to pay the minimum now and again, it's not a huge deal, but don't make a habit of it. Depending on your balance, making only minimum payments can increase the life and sum of your debt considerably. (Try this calculator if you doubt me.) One provision of the CARD Act requires credit card bills to disclose the length of time it will take to pay off a credit card when you only make the minimum payment versus a 3-year plan. It's an important addition, because the reality of nearly endless payments is jarring.
quicklist:title:Charging Anywhere Near Your Credit Limittext: There may be certain life crises that require you to charge a large amount, like an emergency car repair. Try to pay down the balance as quickly as possible. Creditors look very closely every month at the percentage of your available credit that you are using. If you use more than 10% for any meaningful period of time, it will hurt your credit score. 30% of your credit score relates to your credit utilization. If your credit score declines, your cost of borrowing will increase and your access to credit will become more limited. (If you're not sure what your credit utilization ratio is, use Credit.com's free Credit Report Card for a breakdown.)
quicklist:title:Taking Credit Card Cash Advancestext: While there may some instances when you need to take a cash advance and have no other options besides your credit card, keep in mind that it is not a cheap date (often more than 10-15 percentage points higher than the interest rate on purchases). Generally, credit card cash advances only make sense compared to payday loans or a bevy of overdraft charges, but it is an expensive way to borrow money. Consider a personal loan if you really need the cash, but definitely don't use a credit card cash advance for a discretionary purchase that you otherwise can't afford.
quicklist:title: Closing Old Credit Card Accountstext: Closing a credit card account may seem like the best way to celebrate paying off a big, old debt, but consider this: every account represents a component of your available credit and each time you remove such a component by closing it, you are reducing the pool of available credit against which all your credit balances are measured. The less available credit you have, the greater percentage you are using whenever you charge something in another account. Exceed 10% and your credit score is likely to be negatively impacted. When you pay off an account, feel free to cut up the card, but think twice before you close the account. (For more on this, read my recent column.)
READ: The First Thing to Do Before Applying for a Credit Cardquicklist:title:Ignoring the Fine Printtext: Everybody loves a deal and there are some delicious 0% introductory offers out there. Unfortunately, all things must come to an end and so do introductory offers. Make sure you read the fine print to understand your real rate when the music stops and the interest free chair is no longer available. Also, never forget that even the most gorgeous introductory offers get real ugly if you miss a "principal" payment date and the creditor jumps your rate to the default rate.
quicklist:title:Failing to Pick Up the Phonetext: Negotiation is an American pastime. Ask car dealers. If you are running a balance and you feel the interest is too expensive, do some legwork. Check out the other guys and see what rate they would charge. If you find a better deal (including the obligatory balance transfer fee), don't be afraid to call your credit card issuer and haggle. The worst they can say is "no!" In this competitive environment, banks are fighting for your business. Make them work for it.
quicklist:title:Getting Sucked in By Your Favorite Brandtext: Never forget that sales "associates" are often incentivized to get people to sign up for a store credit card. They love to offer you the 10-15% discount deal today, while your acquisition ecstasy is running rampant, against the higher interest rates tomorrow when you run a balance. However, it's amazing how unfashionable retail cards feel once the ether clears and you understand the true cost that you pay to run a balance. If you must have the discount, do the deal, but pay off the balance immediately. Just like the little black dress you couldn't pass up that now hangs in isolation in your closet. Stick the cards in your drawer and sale away (elsewhere).
quicklist:title:Failing to Check Your Credit Card Accounts Dailytext: It's amazing how we can check out our personal email accounts every chance we get, or share everything we do with everyone we know on Twitter, Facebook, and all other forms of social media, but we can't take a few minutes and keep up with our finances! Reviewing credit accounts frequently will alert us to potential identity theft issues, as well as let us know how close we come to our credit limits. Ben Franklin reminded us that "A Stitch in Time Saves Nine." You better believe it when it comes to credit.
quicklist:title: Sending Credit Card Information Via Emailtext: The only thing dumber than entering your credit card information on a website that you discovered by way of a random email link is to send credit card information through your email account. A great number of hackers are looking forward to sharing your credit card information with their friends and associates for their profit and amusement. Their enrichment is not your mission. If you want to buy something or pay a bill online, go to the right financial or retail site, type in the correct URL and make sure it is secure (look for the lock and the "https" in the web address field).
A credit card is a vehicle. You are the driver. If you operate it safely and responsibly it will give you access to the things you want while helping you build a credit portfolio that is an asset, not a liability.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.